Commentary on Political Economy

Friday 1 July 2011

HYMAN MINSKY’s “Finance and Stability: The Limits of Capitalism”.

Minsky correctly sees that the New Deal Settlement was brought to an end by the rise of financial intermediaries that exploited the “dual pricing system” discovered by Keynes. This is the “separation” (financially induced) of “financial assets” (finance capital) as against “productive assets” (industrial capital), - a dichotomy that was the basis of Keynes's theory.
I disagree with this. What was central to Keynes’s theory was “the downward rigidity (or stickiness) of nominal wages. The “dual pricing system” of financial and productive assets is only a CONSEQUENCE of the inability of capital to extract more VALUE in the sphere of production. And here is where Minsky’s “financial instability hypothesis” needs TO BE BROUGHT BACK TO EARTH.

Minsky argues that in the New-Deal State intervened to restore employment and, through inflation, wipe out debts and re-start the investment cycle. But after Bretton Woods from the early ‘70s, the rise of “financial intermediaries” again occasioned a separation between industrial and financial capital that only the intervention of the Fed and Treasury in expanding liquidity and validating asset prices (by “socialising” private debt into public debt) has been able to rescue from a Ponzi collapse.
This is consistent with what I have been arguing throughout about the “need” of “finance capital” (capital in its “liquid” form) to avoid wage antagonism and in the event “speculate” and siphon off profits from “industrial capital” – until, if left “unregulated”, it threatens the entire inter-connected financial structure with collapse. (Indeed, one could say that once engendered, this Ponzi pyramid is unstoppable without e a r l y State intervention.)

The difference between Minsky and our analysis is that he sees these problems as FINANCIAL PROBLEMS, “flaws” or “LIMITS” of capitalism that can be fixed through State intervention. What is lacking is an analysis of WHY the “financial pyramid” of financial assets MUST COLLAPSE eventually. In other words, Minsky fails to tell us WHAT IS IT that gives rise to “financial instability” and WHY such “instability” must crash back down into the “hard rock of reality”.

Whalen (Minsky’s co-writer) stresses that for Minsky “production came before exchange, but finance came before production” – which helps explain the “back-to-front” approach he takes in FIH.

The question is: WHAT is this ‘REALITY’? As I have sought to show repeatedly, the ‘reality’ is the reality of ‘value’ – it is the antagonism of the wage relation. As I argued earlier, it is wage antagonism and the “politico-institutional temptation” of capital to a-void it, to ABSTRACT FROM it, that engenders the financial pyramid and inflates the asset bubbles. In actual fact, Minsky’s “financial instability hypothesis” is limited to a call for “financial repression”, hence his positive attitude to the Volcker Fed policies of the late ‘70s and ‘80s – which helps explain its recent “popularity” with reformist economists (the same “economists” who ridiculed him as a “maverick” while he was alive).

But what brings the 'pyramid' or Ponzi scheme down is the realisation that the inflated asset 'values' have no POLITICAL validity; they cannot be 'REALISED' in new "productive" investments that can generate further profits. This criticism of Minsky is valid also for Keynes. Ultimately, what keeps up Keynes's theoretical structure is "liquidity", that is, the interest rate. But when asked what kept up the interest rate, Keynes famously replied that...."it holds itself up by its own bootstraps"! (Or by "animal spirits").

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